Wärtsilä’s Unprecedented Partnership with Carnival Corporation: The Deal That Has Only Winners

Industrial PRIME | February 14, 2017

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Wärtsilä’s Unprecedented Partnership with Carnival Corporation: The Deal That Has Only Winners

Industrial PRIME | February 14, 2017

79 ships, over 400 engines and one of the largest fleets in the world. After three years of painstaking negotiations, an epic 12-year agreement worth €900 million is born. Can this be real?

Oh, yes it can. It’s as real as Donald Trump becoming the 45th President of the United States. In January, Wärtsilä and the world’s largest cruise company Carnival Corporation & plc concluded an agreement on a major performance-based strategic partnership worth nearly a billion euros.

The comprehensive, 12-year deal will strengthen the two companies’ existing partnership and continuous joint improvement efforts to maintain the highest possible levels for cruise ship safety and reliability.

Worth approximately €900 million, the agreement is performance-based and provides for shared financial incentives and exposure for both companies based on the outcome. The contract becomes effective as of April 1.

Industrial PRIME knew Wärtsilä is no stranger to multi-million euro contracts, but this time we were so impressed by the news that we decided to find out everything we can about the Carnival deal.

We set up a meeting with Mr Tomas Hakala (Vice President, Services, Wärtsilä), who knows the ins and outs of Wärtsilä’s past work with Carnival. He is also the man who has been living and breathing the brand-new agreement since its initial days. We met Hakala in Vaasa, the Nordic capital of energy technologies, and asked him face-to-face, just how did this happen?

“It is a contract quite unlike anything ever made in the history of the marine sector.”

According to Hakala, the new contract is completely different from the collaboration between Wärtsilä and Carnival in recent years. (Image: Industrial PRIME)

Towards Mutual Benefits

Wärtsilä and Carnival have been partners for over two decades already. During this time the two corporations, both leaders in their respective lines of business, have collaborated on various R&D projects, including the development of the common-rail injection system for marine engines.

To say the least, the conditions for the partnership have been ideal: Carnival owns a massive fleet of cruise ships (the total number of vessels being more than 100 and increasing), while Wärtsilä develops marine technology and services that make ships more competitive in operation.

According to Hakala, the relationship between Wärtsilä and Carnival during the past few years has been quite transactional, characterized by low value-adding maintenance services based on list prices.

“This new contract is a pure, 180-degree handbrake turn in comparison to what we did before,” says Hakala. “In fact, it is a contract quite unlike anything ever made in the history of the marine sector.”

To put it briefly, when the contract becomes effective, all engine maintenance and monitoring work for 79 of Carnival’s vessels will be handled by Wärtsilä. Meanwhile, ongoing planning will be a collaboration between the two companies.

What makes the contract interesting is that it is all based on mutual incentives (and of course shared risks): if Wärtsilä manages to help Carnival improve its vessels’ fuel efficiency, Wärtsilä will get its share of the benefits.

The potential is not insignificant – after all, with over €1 billion spent on fuel annually, Carnival is the second-biggest buyer of marine fuel in the world.

Moreover, there are nearly 400 Wärtsilä engines in the 79 Carnival ships covered by the contract, so there should be plenty to work with. For Wärtsilä, the expected revenue from the contract is €75 million annually.

“The mutual goals and shared benefits are the real beef of the agreement,” confirms Hakala, while emphasizing the sharing of benefits. “This is much more interesting than traditional business, where one tries to sell as much as they can and the other buy as little as possible. In such a setup, it’s never possible to satisfy both sides.”

“In case maintenance is needed on board, Wärtsilä has personnel standing by in practically every corner of the world.”

When the contract becomes effective, all engine maintenance and monitoring work for 79 of Carnival’s vessels will be handled by Wärtsilä. (Image: Wärtsilä)

Significant Savings with Proactive Maintenance

What is the plan, then? How is Wärtsilä going to help Carnival optimize the operation of its 79 vessels and achieve significant savings in fuel consumption?

To begin with, the agreement includes Wärtsilä’s Dynamic Maintenance Planning (DMP) and Condition-Based Maintenance (CBM). In short, digitalized data streams are captured from each engine, after which the data is analysed by specialists. This allows real-time optimization of the equipment whilst predicting operational and maintenance demands.

“No matter where the cruisers are – and they are dispersed across the globe, so we will be sort of chasing a constantly moving target – we will be on guard and know what’s going on, twenty-four seven,” claims Hakala. “In case maintenance is needed on board, Wärtsilä has personnel standing by in practically every corner of the world.”

In relation to maintenance, Hakala brings up individual components of engines. The CBM data enables Wärtsilä to determine the condition of components that directly affect the engines’ fuel-efficiency.

“In many cases, replacing a component early is a much better option than waiting and letting it wear out, in which case it would make the engine less efficient.”

This might sound like peanuts, but let’s keep in mind the immense size of Carnival’s fleet. Thanks to that, even the smallest of improvements can add up to significant annual savings in fleet operational costs.

“You need to have a really good relationship to be able to negotiate like we did. That’s one of the secrets behind our eventual success.”

Equipped with six Wärtsilä engines, Carnival Dream is one of the 79 ships covered by the agreement. (Image: Wärtsilä)

Three Years of Negotiations

Early on, Carnival Chief Maritime Officer Mr William Burke made it clear to the people at Wärtsilä that he wanted them to ensure a high performance in three aspects: safety, efficiency, and reliability.

In the fast-growing cruise market currently bringing Carnival over 11 million passengers per year, these are all critical advantages worth investing in.

“Out of these, safety is of course non-negotiable,” Hakala explains. “Efficiency, on the other hand, will bring savings in operational costs, while reliability contributes to the impeccable cruise experience for the passengers.”

Certainly, fuel is not the only way for a cruise operator to improve its business. It is the unwritten rule in the cruise business that the schedule must not be disrupted owing to technical reasons: as long as the weather so allows, the ship will arrive at every port according to schedule and will definitely not miss any ports. Otherwise, the customer is not going to be happy, and the business may suffer.

The idea that eventually led to the new partnership was brought up roughly three years ago. Obviously, €900-million deals are not struck overnight. Nor are they done with just anyone.

“In principle, partnerships of such scale are born when the concepts of two companies meet in a way that they can be combined,” says Hakala. “In this case, we both had our own concepts and ideas, but still it took us nearly three years to hone the details of the agreement into a form that satisfied both parties.”

During the past three years, the two corporations had a myriad of meetings, often with twenty or more people on each side of the table. Hakala, who used to work in Miami but is now stationed in Vaasa, says he crossed the Atlantic Ocean at least once practically every month.

One of the most important things contributing to the agreement were mutual trust between the two corporations and a direct, hands-on approach towards the negotiations.

“It was very direct, but always professional,” confirms Hakala. “Direct shots were fired, but always for the benefit of the big picture. They would say, ‘This is not acceptable, and the reasons are X, Y and Z.’ Then we would go and find the solutions to X, Y and Z, after which the negotiations could resume.”

“You need to have a really good relationship to be able to negotiate like that. And I think that’s one of the secrets behind our eventual success.”

Three years of hard work has been concluded, then, and another twelve years are about to follow. It looks like there’s plenty of benefits to reap, but just how big of a harvest is Wärtsilä going to be able to grow eventually?

Who knows, perhaps Industrial PRIME will tell you everything about it in 2029.